EQUITY

Responsi Akkeu 2
 COMPONENTS OF EQUITY

Equity is often subclassified on the statement of financial

position into the following categories
1. Share capital.

2. Share premium.

3. Retained earnings.

4. Accumulated other comprehensive income.

(translation of foreign currency dan change in fair value of
non trading assets/liabilities)

5. Treasury shares.

6. Non-controlling interest (minority interest).

 EQUITY

Ordinary
OrdinaryShares
Shares
Account
Account
Contributed
Contributed Share
SharePremium
Premium
Capital
Capital Account
Account
Preference
PreferenceShares
Shares
Account
Account

Two Primary
Sources of Retained
RetainedEarnings
Earnings
Account
Account
Equity Assets
Liabilities =
Less:
Less: Equity
Treasury
TreasuryShares
Shares
Account
Account
 Accounting For

Issuance of Shares Treasury Shares

Distributing
Preference Shares
Dividend
 Issuance of Shares

Accounting problems involved in the issuance of shares:

1. Par value shares disebut juga Stated Value = ada Share Premium

2. No-par shares = tidak ada share premium

3. Shares issued in combination with other securities. (bundling

jualnya)

4. Shares issued in non-cash transactions = didebit bukan cash

melainkan aset lain yang didapatkan atau pengurangan liability
saat issuing shares

5. Costs of issuing shares.

EQUITY (Par/Stated Value)

Illustration: Some countries require that no-par shares have a

stated value. If a company issued 1,000 of the shares with a 5
stated value at 15 per share for cash, it makes the following
entry.

Cash 15,000
Share CapitalOrdinary 5,000
Share PremiumOrdinary 10,000
EQUITY (No Par)

Illustration: Video Electronics Corporation is organized with

10,000 ordinary shares authorized without par value. If Video
Electronics issues 500 shares for cash at 10 per share, it
makes the following entry.

Cash 5,000
Share CapitalOrdinary 5,000

Video Electronics issues another 500 shares for 11 per share.

Cash 5,500
Share CapitalOrdinary 5,500
EQUITY (Combination using Propotional)
BE15-4: Ravonette Corporation issued 300 shares of $10 par value
ordinary shares and 100 shares of $50 par value preference shares for
a lump sum of $13,500. The ordinary shares have a market value of
$20 per share, and the preference shares have a market value of $90
per share.

Proportional
Method
EQUITY (Combination using Propotional)
BE15-4: Ravonette Corporation issued 300 shares of $10 par value
ordinary shares and 100 shares of $50 par value preference shares for
a lump sum of $13,500. The ordinary shares have a market value of
$20 per share, and the preference shares have a market value of $90
per share.

Journal entry (Proportional):

Cash 13,500
Share CapitalPreference (100 X $50) 5,000
Share PremiumPreference 3,100
Share CapitalOrdinary (300 X $10) 3,000
Share PremiumOrdinary 2,400
EQUITY (Combination using Incremental)
BE15-4 (Variation): Ravonette Corporation issued 300 shares of $10 par
value ordinary shares and 100 shares of $50 par value preference
shares for a lump sum of $13,500. The ordinary shares have a market
value of $20 per share, and the value of preference shares are unknown.

Incremental
Method
EQUITY (Combination using Incremental)
BE15-4 (Variation): Ravonette Corporation issued 300 shares of $10 par
value ordinary shares and 100 shares of $50 par value preference
shares for a lump sum of $13,500. The ordinary shares have a market
value of $20 per share, and the value of preference shares are unknown.

Journal entry (Incremental):

Cash 13,500
Share CapitalPreference (100 X $50) 5,000
Share PremiumPreference 2,500
Share CapitalOrdinary (300 X $10) 3,000
Share PremiumOrdinary 3,000
EQUITY (non cash transaction)

Illustration: The following series of transactions illustrates the

procedure for recording the issuance of 10,000 shares of 10
par value ordinary shares for a patent for Marlowe Company,
in various circumstances.

1. Marlowe cannot readily determine the fair value of the

patent, but it knows the fair value of the shares is 140,000.

Patent 140,000
Share CapitalOrdinary 100,000 Fair Value shares

Share PremiumOrdinary 40,000

EQUITY (non cash transaction)

2. Marlowe cannot readily determine the fair value of the

shares, but it determines the fair value of the patent is
150,000.

Patent 150,000
Share CapitalOrdinary 100,000 Fair Value Asset
received
Share PremiumOrdinary 50,000
EQUITY (non cash transaction)

3. Marlowe cannot readily determine the fair value of the

shares nor the fair value of the patent. An independent
consultant values the patent at 125,000 based on
discounted expected cash flows.

Patent 125,000
Share CapitalOrdinary 100,000 Fair Value from
Consultant
Share PremiumOrdinary 25,000
Treasury Shares

Purchase of Treasury Shares

Two acceptable methods:

Cost method (more widely used) = berdasarkan biaya yang

digunakan untuk memperoleh dan menjual kembali

Par or Stated value method.

Treasury shares reduce equity.

 EQUITY

Illustration: Pacific Company issued 100,000 shares of $1 par

value ordinary shares at a price of $10 per share. In addition, it
has retained earnings of $300,000.

ILLUSTRATION 15-4
Equity with No Treasury
Shares
EQUITY

Illustration: Pacific Company issued 100,000 shares of $1

par value ordinary shares at a price of $10 per share. In
addition, it has retained earnings of $300,000.
On January 20, 2015, Pacific acquires 10,000 of its shares
at $11 per share. Pacific records the reacquisition as follows.

Treasury Shares 110,000

Cash 110,000
 EQUITY

Illustration: The equity section for Pacific after purchase of the

treasury shares.

ILLUSTRATION 15-5
Equity with Treasury
Shares
EQUITY

Sale of Treasury Shares

Above Cost
Below Cost

Both increase total assets and equity.

Retiring Treasury Shares

Decision results in
cancellation of the treasury shares and
a reduction in the number of shares of issued shares.

Retired treasury shares have the status of authorized and unissued shares.
EQUITY

Sale of Treasury Shares above Cost. Pacific acquired

10,000 treasury shares at $11 per share. It now sells 1,000
shares at $15 per share on March 10. Pacific records the entry
as follows.

Cash 15,000
Treasury Shares 11,000
Share PremiumTreasury 4,000
EQUITY

Sale of Treasury Shares below Cost. Pacific sells an

additional 1,000 treasury shares on March 21 at $8 per share,
it records the sale as follows.

Cash 8,000
Share PremiumTreasury 3,000
Treasury Shares 11,000
 EQUITY

ILLUSTRATION 15-6
Treasury Share
Transactions in Share
PremiumTreasury
Account

Illustration: Assume that Pacific sells an additional 1,000 shares

at $8 per share on April 10.

Cash 8,000
Share PremiumTreasury 1,000
Retained Earnings 2,000
Treasury Shares 11,000
PREFERENCE SHARES

Features often associated with preference shares.

1. Preference as to dividends.

2. Preference as to assets in the event of liquidation.

3. Convertible into ordinary shares.

4. Callable at the option of the corporation.

5. Non-voting.
PREFERENCE SHARES

Illustration: Bishop Co. issues 10,000 shares of 10 par

value preference shares for 12 cash per share. Bishop
records the issuance as follows:

Cash 120,000
Share CapitalPreference 100,000
Share PremiumPreference 20,000
DIVIDEND POLICY

Types of Dividends
1. Cash dividends. 3. Liquidating dividends.
2. Property dividends. 4. Share dividends.

All dividends, except for share dividends, reduce the total

equity in the corporation.
Cash Dividend

Board of directors vote on the declaration of cash

dividends.
A declared cash dividend is a liability.

Companies do not
declare or pay cash
Three dates:
dividends on treasury
a. Date of declaration
shares.
b. Date of record
c. Date of payment
Cash Dividend

Illustration: Roadway Freight Corp. on June 10 declared a cash

dividend of 50 cents a share on 1.8 million shares payable July
16 to all shareholders of record June 24.

At date of declaration (June 10)

Retained Earnings 900,000
Dividends Payable 900,000

At date of record (June 24) No entry

At date of payment (July 16)

Dividends Payable 900,000
Cash 900,000
Property Dividends

Dividends payable in assets other than cash.

Restate at fair value the property it will distribute,
recognizing any gain or loss.
Property Dividends
Illustration: Tsen, Inc. transferred to shareholders some of its
investments (held-for-trading) in securities costing HK$1,250,000
by declaring a property dividend on December 28, 2014, to be
distributed on January 30, 2015, to shareholders of record on
January 15, 2015. At the date of declaration the securities have a
fair value of HK$2,000,000. Tsen makes the following entries.

At date of declaration (December 28, 2014)

Equity Investments 750,000
Unrealized Holding Gain or LossIncome 750,000
Retained Earnings 2,000,000
Property Dividends Payable 2,000,000
Property Dividends
Illustration: Tsen, Inc. transferred to shareholders some of its
investments (held-for-trading) in securities costing HK$1,250,000
by declaring a property dividend on December 28, 2014, to be
distributed on January 30, 2015, to shareholders of record on
January 15, 2015. At the date of declaration the securities have a
fair value of HK$2,000,000. Tsen makes the following entries.

At date of distribution (January 30, 2015)

Property Dividends Payable 2,000,000
Equity Investments 2,000,000
Liquidating Dividends

Any dividend not based on earnings reduces amounts

paid-in by shareholders.
Liquidating Dividends

Illustration: McChesney Mines Inc. issued a dividend to its

ordinary shareholders of 1,200,000. The cash dividend
announcement noted that shareholders should consider 900,000
as income and the remainder a return of capital. McChesney Mines
records the dividend as follows.

Date of declaration

Retained Earnings 900,000

Share PremiumOrdinary 300,000
Dividends Payable 1,200,000
Liquidating Dividends

Illustration: McChesney Mines Inc. issued a dividend to its

ordinary shareholders of 1,200,000. The cash dividend
announcement noted that shareholders should consider 900,000
as income and the remainder a return of capital. McChesney Mines
records the dividend as follows.

Date of payment

Dividends Payable 1,200,000

Cash 1,200,000
Share Dividends

Illustration: Vine Corporation has outstanding 1,000 shares of 1

par value ordinary shares and retained earnings of 50,000. If Vine
declares a 10 percent share dividend, it issues 100 additional shares
to current shareholders. If the fair value of the shares at the time of
the share dividend is 8 per share, the entry is:

Date of declaration
Retained Earnings 10,000

Ordinary Share Dividend Distributable 10,000

Share Dividends

Illustration: Vine Corporation has outstanding 1,000 shares of 1

par value ordinary shares and retained earnings of 50,000. If Vine
declares a 10 percent share dividend, it issues 100 additional shares
to current shareholders. If the fair value of the shares at the time of
the share dividend is 8 per share, the entry is:

Date of distribution

Ordinary Share Dividend Distributable 10,000

Share CapitalOrdinary 10,000

 Share Splits

To reduce the market value of shares.

No entry recorded for a share split.
Decrease par value and increased number of shares.

ILLUSTRATION 15-13
Effects of a Share Split